Acquisition Activity and IPO Underpricing

Abstract

We propose an “M&A activity” hypothesis as a partial explanation for IPO underpricing. When going public during active corporate control markets, managers may take actions intended to safeguard their control. In support of this conjecture, we find that pre-IPO M&A activity directly explains IPO underpricing. We also find that underpricing and ownership dispersion are positively correlated; as are ownership dispersion and the probability of remaining independent. Considering the possibility that some managers take their firms public for the purpose of being acquired, our findings indicate that the positive link between M&A activity and underpricing is not robust for firms that are subjectively viewed as likely targets.

Keywords: Underpricing, Initial public offerings, Merger and acquisitions, Corporate control, Governance

JEL Classification: G24, G30, G32, G34